Good quarter isn't enough
Most of 2002 was so bad for stock funds that a strong finish couldn't save the year from being a downer. By KENNETH N. GILPIN The New York Times Sunday, January 5, 2003
The fourth quarter was a good one for stock mutual funds, but the market had declined so sharply in the nine previous months that 2002 ended as the third consecutive miserable year.
"It was nice to see something go up, but compared to where we were three years ago, it was a drop in the bucket," said Russ Kinnel, the director of funds research at Morningstar. "We are still looking at some pretty sizable losses in many areas."
Fueled by the rise in major market averages, which spent the first two months of the quarter rallying from lows set in early October, the average domestic equity fund gained just less than 6 percent in the quarter, according to Morningstar data. But that gain merely pared nine months' worth of sizable losses: For the year, the average domestic equity fund lost more than 20 percent of its value.
Last year was the worst for stock funds since 1974 and contrasted sharply with the 1990s, when the group rose in eight of the 10 years.
The 2002 declines were breathtakingly pervasive across the fund industry. Lipper Inc., which tracks fund performance, said 96 percent of equity funds finished the year in negative territory.
For the year, only three groups of funds had positive returns: gold funds, up more than 60 percent; specialty diversified equity funds, which include funds that short the market, up more than 8 percent; and real estate funds, up a bit more than 3 percent.
"Last year was about as bad as it can get," said Thomas M. McManus, chief investment strategist at Banc of America Securities. "But the good thing about the sharp fall in stocks is that it makes the market more resistant to further declines.
"I suppose you could come up with some scenario in which people would want to sell stocks below their October lows," McManus added. "But we think the market is making a gradual recovery."
Those who did well in 2002 did so by "avoiding mistakes" in the stock market, said Thomas F. Marsico, the president and chief investment officer of Marsico Funds. "If you avoided Tyco, WorldCom and Enron, you outperformed the market," he said.
At the end of 2001, he said, he was wary about what might happen over the next 12 months. "A year ago, our portfolios were pretty defensive," he said. "We are now somewhat more optimistic."
It was a good quarter for natural-resources funds, which rode the sharp rise in the price of oil. The end of Brazil's two-stage election process, and the decisive victory of Luiz Inacio Lula da Silva in the presidential race, was a tonic to Latin American stocks. Emerging-markets funds in general did well, as did most funds that focus on foreign stock markets.
Tom Soviero, who manages the $2.2 billion Fidelity Advisor High Income Advantage fund, said that if one event helped the high-yield market, it was the Fed's rate cut in early November. "That was a statement that liquidity was going to be provided," he said. "Also, the equity market helped quite a bit, led by technology and telecommunications stocks."
Although High Income Advantage was up more than 13 percent for the quarter, it fell by more than 5 percent for all of 2002.
"It's been a tough year," Soviero said. "I'm not bragging. But I hope the recent trend continues."
It seemed to be a good quarter for technology and telecommunications stocks, which bounced sharply off what some analysts said were oversold levels. Still, many said fundamental indicators suggested weak demand for products from personal computers to fiber-optic cable.
Nevertheless, technology funds posted a gain of just under 20 percent in the quarter. And telecommunications funds rose nearly 16 percent, according to Morningstar.
But those gains did little to transform a horrific year for the sector.
In 2002, science and technology funds lost more than 40 percent of their value, according to Lipper. So did telecommunications funds – their worst performance on record. Over the past three years, both groups have lost more than 70 percent of their value.
Steven F. Crowley, co-manager of one of the quarter's best performers, Kopp Emerging Growth fund, has about 90 percent of its assets in health care, medical technology and technology stocks.
"In our opinion, these stocks went down to a valuation extreme," he said. "If the economy doesn't grow next year, you will be hard-pressed to make the case that technology spending is going to grow."